Vertex One Asset Management Inc. et al.
Headnote
Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- National Instrument 81-102 Investment Funds section 5.5(1)(a) -- Change of Manager Approval -- An investment fund manager seeks approval to change the investment fund manager under the approval requirements in section 5.5(1)(a) of NI 81-102 -- The Filer established the experience and integrity of the new manager; there are no expected material changes to the day-to-day management, business, operations or affairs of the investment fund; the independent review committee reviewed the change of manager; security holders have voted or will vote to approve the change of manager.
Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- National Instrument 81-102 Investment Funds section 5.5(1)(c) -- Change of Custodian Approval -- An investment fund manager seeks approval of a change of custodian under the approval requirements of section 5.5(1)(c) of NI 81-102 -- The change of custodian is in connection with a change or proposed change of the investment fund manager; the proposed custodial arrangements will comply with Part 6 of NI 81-102; the independent review committee of the investment funds has provided a positive recommendation; the change in custodian will be beneficial to security holders and the investment funds.
Applicable Legislative Provisions
National Instrument 81-102 Investment Fund, ss. 5.5(1)(a), 5.7(1)(a); ss. 5.5(1)(c) and 5.7(1)(c).
January 10, 2020
IN THE MATTER OF THE SECURITIES LEGISLATION OF BRITISH COLUMBIA AND ONTARIO (the Jurisdictions) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF VERTEX ONE ASSET MANAGEMENT INC. (the Filer) AND PICTON MAHONEY ASSET MANAGEMENT (PICTON MAHONEY) AND VERTEX LIQUID ALTERNATIVE FUND VERTEX LIQUID ALTERNATIVE FUND PLUS VERTEX BOND ALPHA FUND (THE AFFECTED FUNDS)
DECISION
Background
¶ 1 The securities regulatory authority or regulator in each of the Jurisdictions (Decision Maker) has received an application from the Filer and Picton Mahoney for a decision under the securities legislation of the Jurisdictions (the Legislation) for:
(a) approval under subsection 5.5(1)(a) of National Instrument 81-102 Investment Funds (NI 81-102), of the change of manager (the Change of Manager) of the Affected Funds from the Filer to Picton Mahoney Asset Management (Picton Mahoney) (the Change of Manager Approval); and
(b) approval under subsection 5.5(1)(c) of NI 81-102, of the change of custodian (the Change of Custodian) of the Affected Funds from CIBC Mellon Trust Company to RBC Investor and Treasury Services (RBC I&TS) (the Change of Custodian Approval).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a dual application):
(a) the British Columbia Securities Commission is the principal regulator for this application;
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada except Quebec and Ontario; and
(c) the decision is the decision of the principal regulator and evidences the decision of the securities regulatory authority or regulator in Ontario.
Interpretation
¶ 2 Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
Representations
¶ 3 This decision is based on the following facts represented by the Filer and, in relation to the facts in representations 13 to 21 and 32 to 52, by Picton Mahoney:
Vertex One Asset Management Inc.
1. the Filer is a corporation incorporated under the laws of Canada with its head office located at suite 3200 -- 1021 West Hastings Street, Vancouver, British Columbia, V6E 0C3;
2. the Filer is registered as: (a) an investment fund manager in each of the provinces of Canada; (b) a portfolio manager in each of the provinces of Canada, other than Newfoundland and Labrador and Quebec; and (c) an exempt market dealer in each of the provinces of Canada, other than Newfoundland and Labrador, and such registrations have not been cancelled or revoked;
3. the Filer is the manager and portfolio manager of each of the Affected Funds; the Filer may appoint third party sub-advisers to the Affected Funds;
4. the Filer is not in default of securities legislation in any jurisdiction;
5. the Filer offers discretionary portfolio management services to individuals, institutions and other entities seeking wealth management or related services;
Affected Funds
6. the Affected Funds are each mutual fund trusts established under the laws of British Columbia under a master trust agreement dated December 18, 2018, entered into by the Filer, in its capacity as manager of the Affected Funds and CIBC Mellon Trust Company, as trustee of the Affected Funds with effect as of January 3, 2019 in respect of the Affected Funds;
7. any securities issued by the Affected Funds have been sold to investors in accordance with applicable securities legislation;
8. the Vertex Liquid Alternative Fund Plus and Vertex Bond Alpha Fund currently offer two classes of units, Class B units and Class F units;
9. the Vertex Liquid Alternative Fund currently offers three classes of units, Class B units, Class F units and Class O units;
10. the Affected Funds are reporting issuers in all of the provinces and territories of Canada, other than Quebec;
11. the Affected Funds are not in default of securities legislation in any jurisdiction;
12. securities of the Affected Funds are offered under a simplified prospectus and fund facts documents dated January 11, 2019, as amended by Amendment No. 1 dated September 5, 2019, and Amendment No. 2 dated October 31, 2019, and under an amended and restated annual information form for alternative mutual funds dated April 9, 2019, as amended by Amendment No. 1 dated September 5, 2019, and Amendment No. 2 dated October 31, 2019;
Picton Mahoney
13. Picton Mahoney is a general partnership established under the laws of Ontario with its head office located at 830-33 Yonge Street, Toronto, ON, M5E 1G4;
14. Picton Mahoney is registered as: (a) an investment fund manager in Ontario, Quebec and Newfoundland and Labrador; (b) a portfolio manager in Ontario, Quebec, British Columbia, Manitoba, Saskatchewan and Prince Edward Island; (c) an exempt market dealer in Ontario, Quebec, British Columbia, Manitoba, Saskatchewan, Alberta, Prince Edward Island and Newfoundland and Labrador; and (d) a commodity trading manager in Ontario;
15. Picton Mahoney is not in default of securities legislation in any jurisdiction;
16. Picton Mahoney was founded in 2004 and currently manages approximately $7.4 billion for institutional and retail investors across the country, including seven publicly traded mutual funds, and nine private investment funds; Picton Mahoney specializes in alternative investment strategies, including rules-based volatility management;
17. Picton Mahoney is the manager of a group of alternative mutual funds consisting of the Picton Mahoney Fortified Active Extension Alternative Fund, Picton Mahoney Fortified Market Neutral Alternative Fund, Picton Mahoney Fortified Multi-Strategy Alternative Fund, Picton Mahoney Fortified Income Alternative Fund (the Picton Mahoney Alternative Funds), and a group of conventional mutual funds consisting of the Picton Mahoney Fortified Equity Fund, Picton Mahoney Fortified Income Fund and Picton Mahoney Fortified Multi-Asset Fund (the Picton Mahoney Mutual Funds); each of the Picton Mahoney Alternative Funds and Picton Mahoney Mutual Funds is considered to be a separate mutual fund under section 1.3(1) of NI 81-102;
18. each of the Picton Mahoney Alternative Funds is a reporting issuer in all of the provinces and territories of Canada; shares of the Picton Mahoney Alternative Funds are offered under a simplified prospectus, annual information form and fund facts documents dated July 5, 2019; the Picton Mahoney Alternative Funds are not in default of securities legislation in any jurisdiction;
19. each of the Picton Mahoney Mutual Funds is a reporting issuer in all of the provinces and territories of Canada; shares of the Picton Mahoney Mutual Funds are offered under a simplified prospectus, annual information form and fund facts documents dated August 20, 2019; the Picton Mahoney Mutual Funds are not in default of securities legislation in any jurisdiction;
20. in addition to managing the Picton Mahoney Alternative Funds and the Picton Mahoney Mutual Funds, Picton Mahoney is the manager and portfolio manager of the Picton Mahoney Diversified Strategies Fund, Picton Mahoney Market Neutral Equity Fund, Picton Mahoney Income Opportunities Fund, Picton Mahoney Long Short Equity Fund, Picton Mahoney Concentrated Opportunistic Long Short Fund, Picton Mahoney Special Situations Fund, Picton Mahoney 130/30 Alpha Extension Canadian Equity Fund, Picton Mahoney Canadian 130/30 Pension One Fund and Picton Mahoney World 130/30 Canadian Equity Fund (the Picton Mahoney Private Funds); the securities of each of the Picton Mahoney Private Funds are offered on a prospectus-exempt basis in Canada;
21. upon the change of domicile of the Affected Funds to Ontario as described in representation 25 below, Picton Mahoney will possess all registrations under securities legislation and National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103) to allow it to manage the Affected Funds after Closing (as defined below);
The Change of Manager
22. under the purchase agreement entered into between the Filer and Picton Mahoney dated October 21, 2019 (the Purchase Agreement), Picton Mahoney agreed with the Filer to purchase from the Filer the fund contracts of the Filer related to the investment fund management business conducted by the Filer in respect of the Affected Funds and related assets (the Transaction);
23. the Transaction is expected to be completed on or about January 10, 2020 (the Closing), subject to receiving all necessary securityholder, regulatory and other approvals and satisfying the conditions of closing contained in the Purchase Agreement;
24. under the Purchase Agreement, the Filer will (a) appoint Picton Mahoney as successor investment fund manager of the Affected Funds and Picton Mahoney will accept such appointment as of and with effect from the time of the Closing; and (b) resign as investment fund manager of the Affected Funds as of and with effect from the time of the Closing; under the Transaction, the Change of Manager will occur for all of the Affected Funds;
25. upon Closing, the domicile of the Affected Funds will be changed from British Columbia to Ontario; this change is appropriate because Picton Mahoney intends to carry out its fund management activities from its head office in Toronto, Ontario;
26. the Transaction was approved by the board of directors of the Filer on October 21, 2019, and by the Executive Committee of Picton Mahoney on August 26, 2019;
27. on October 29, 2019, the independent review committee established for the Affected Funds (the Vertex IRC) under National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107) met to consider the Change of Manager and advised the Filer that in the opinion of the Vertex IRC, after reasonable enquiry, the Change of Manager would achieve a fair and reasonable result for the Affected Funds; the results of the Vertex IRC's review of the Change of Manager is referred to in the Circular (as defined below);
28. under section 5.5(1)(a) of NI 81-102, the approval of the securities regulatory authority or regulator is required before the manager of an investment fund is changed, unless the new manager is an affiliate of the current manager; because the Filer and Picton Mahoney are not affiliates, the Change of Manager Approval is required;
Other Requirements
29. the approval of the Change of Manager by unitholders of the Affected Funds as required under NI 81-102 was obtained at special meetings of the Affected Funds' unitholders on November 28, 2019; the notice of meeting and the management information circular of the Filer (the Circular) were mailed to unitholders of the Affected Funds on October 31, 2019, in compliance with the notice and form requirements of section 5.4 of NI 81-102; copies of both the notice of meeting and Circular have been filed on SEDAR; none of the expenses of these approvals will be incurred by the Affected Funds or the unitholders of the Affected Funds and the approvals meet the requirements of section 5.4 of NI 81-102;
30. the Circular contained sufficient information regarding the business, management and operations of Picton Mahoney, including a discussion regarding the tax implications of the Change of Manager, to permit unitholders of the Affected Funds to make an informed decision whether to approve the Change of Manager which is required before the Transaction can be completed; all other information and documents necessary to comply with applicable proxy solicitation requirements of securities legislation for the special meetings were also mailed to unitholders of the Affected Funds;
31. as required by section 11.2 of NI 81-106 Investment Fund Continuous Disclosure (NI 81-106), a press release disclosing the Transaction and Change of Manager was issued and posted on the website of the Filer and filed on SEDAR on October 21, 2019; in addition, a Form 51-102F3 Material Change Report describing the Transaction and Change of Manager was filed on SEDAR on October 31, 2019;
32. Picton Mahoney has provided notice of the Transaction to the British Columbia Securities Commission and Ontario Securities Commission under section 11.9 of NI 31-103;
The Change of Custodian
33. as a result of the Change of Manager, Picton Mahoney expects to change the custodian of the Affected Funds (the Change of Custodian) by the end of August 2020;
34. as the Change of Custodian is being implemented in connection with the Change of Manager, the approval of the Regulators under section 5.5(1)(c) is required;
35. Picton Mahoney believes the Change of Custodian will be beneficial to the Affected Funds and their securityholders as it will create administrative efficiencies by having custody of all the mutual funds managed by Picton Mahoney with the same custodian;
36. the current custodian of the Affected Funds is CIBC Mellon Trust Company;
37. the custodian of each Affected Fund will be changed to RBC I&TS; RBC I&TS may engage sub-custodians in connection with the assets of the Affected Funds; Picton Mahoney is not an affiliate of RBC I&TS;
38. RBC I&TS is the custodian of the Picton Mahoney Mutual Funds and Picton Mahoney Alternative Funds;
39. RBC I&TS provided custodian reports to Picton Mahoney in relation to the Picton Mahoney Mutual Funds and the Picton Mahoney Alternative Funds for the year ended December 31, 2018; in these custodian reports, RBC I&TS confirmed that it satisfies the requirements to act as a qualified custodian as prescribed in section 6.2 of NI 81-102 and, in particular, RBC I&TS is a trust company incorporated under the laws of Canada and has equity, as reported in its most recent audited financial statement, of not less than $10,000,000 (the Custodial Qualification Requirement); these custodian reports were filed by Picton Mahoney on SEDAR on March 28, 2019;
40. Picton Mahoney believes that the Change of Custodian will have no adverse impact on continued compliance by the Affected Funds, the Picton Mahoney Mutual Funds or the Picton Mahoney Alternative Funds with Part 6 of NI 81-102;
41. Picton Mahoney does not regard the Change of Custodian as a "material change" as defined in section 1.1 of NI 81-106;
42. the Change of Custodian will not be detrimental to the protection of the investors in the Affected Funds or prejudicial to the public interest;
Impact of Change of Manager on the Affected Funds
43. upon Closing, Picton Mahoney will become the manager of the Affected Funds; in addition to the Change of Manager, Picton Mahoney intends to make certain other consequential changes to the Affected Funds, including changing the portfolio manager of the Affected Funds to Picton Mahoney and changing the names of the Affected Funds to continue under the Picton Mahoney branded-family of funds; all material agreements regarding the administration of the Affected Funds will either be assigned to Picton Mahoney and amended and restated by Picton Mahoney or be terminated, and Picton Mahoney may enter into new agreements with the relevant service providers, as required; the assignment and assumption by Picton Mahoney of certain contracts is a condition of, and will occur concurrently with, Closing;
44. Picton Mahoney has an independent review committee in place for all of its funds (the Picton Mahoney IRC) and upon completion of the Change of Manager the members of the Picton Mahoney IRC will serve as the independent review committee for the Affected Funds;
45. Picton Mahoney has or will have the appropriate personnel, policies and procedures and systems in place to assume the management of the Affected Funds on Closing;
46. upon Closing, it is expected that both Craig Chilton and Tom Savage, the current advising representatives of the Filer that are portfolio managers of the Affected Funds, will become advising representatives of Picton Mahoney, which will ensure that the Affected Funds continue to be managed in a substantially similar manner to how they were managed prior to the Change of Manager;
47. Picton Mahoney has no current intention to change the investment objectives or investment strategies of the Affected Funds or increase the fees and expenses of the Affected Funds;
48. the directors and officers of Picton Mahoney will have the integrity and experience to manage and operate the Affected Funds on Closing as contemplated by section 5.7(1)(a)(v) of NI 81-102;
49. the Transaction is not expected to have any material impact on the business, operations or affairs of the Affected Funds or the securityholders of the Affected Funds and Picton Mahoney intends to manage the Affected Funds in a similar manner as the Filer;
50. the Affected Funds will not bear any of the costs and expenses associated with the Change of Manager of the Affected Funds; such costs will be borne by the Filer and Picton Mahoney;
51. the Change of Manager is not expected to adversely affect the respective financial positions of the Filer or Picton Mahoney nor their respective abilities to fulfill their regulatory obligations;
52. on Closing, the auditors of the Affected Funds, PricewaterhouseCoopers LLP, and trustee of the Affected Funds will not change; and
53. the Change of Manager will not be detrimental to the protection of investors in the Affected Funds or prejudicial to the public interest.
Decision
¶4 Each of the Decision Makers is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the Decision Makers under the Legislation is that:
1. the Change of Manager Approval is granted; and
2. the Change of Custodian Approval is granted provided that:
(a) prior to the implementation of the Change of Custodian,
(i) CIBC Mellon Trust Company will provide to Picton Mahoney a custodian report in relation to the Affected Funds for the year ended December 31, 2019 and Picton Mahoney will file this custodian report on SEDAR; and
(ii) RBC I&TS will provide to Picton Mahoney custodian reports in relation to the Picton Mahoney Mutual Funds and the Picton Mahoney Alternative Funds for the year ended December 31, 2019 and Picton Mahoney will file these custodian reports on SEDAR;
(b) the Change of Custodian and the custodial agreement and arrangements between the Affected Funds and RBC I&TS will be implemented in compliance with Part 6 of NI 81-102 and, in particular, RBC I&TS will meet the Custodial Qualification Requirement, and the agreement between RBC I&TS will comply with section 6.4 of NI 81-102, including the requirement that the custodial agreement and any sub-custodial agreements provide for the location of portfolio assets, any appointment of a sub-custodian, requirements concerning lists of sub-custodians, the method of holding portfolio assets, the standard of care and responsibility for loss, and requirements concerning review and compliance reports, in each case, in accordance with Part 6 of NI 81-102;
(c) as the Change of Custodian may be considered a "conflict of interest matter" as defined in section 1.2 of NI 81-107, prior to the implementation of the Change of Custodian, Picton Mahoney will refer the Change of Custodian to the then current independent review committee for the Affected Funds and will proceed with the Change of Custodian in accordance with section 5.3 of NI 81-107; and
(d) Picton Mahoney will
(i) provide general disclosure, by press release or other means, of the Change of Custodian to unitholders of the Affected Funds prior to implementation of the Change of Custodian;
(ii) file a copy of the custodial agreement between the Affected Funds and RBC I&TS on SEDAR within 10 days following its effective date; and
(iii) cause the Affected Funds to disclose details of the Change of Custodian in the renewal prospectus documents that are next filed following the implementation of the Change of Custodian.